Technocraft Industries (India) Limited (TIIL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Technocraft Industries India Limited Q1 FY '26 Post Results Earnings Conference Call hosted by Batlivala & Karani Securities India Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Purva Zanwar from Batlivala & Karani Securities India Private Limited. Thank you, and over to you, ma'am.

Thank you, Ridhi. On behalf of B&K Securities, we welcome you all to the Q1 FY '26 Conference Call of Technocraft Industries India Limited. From the management side, we have Mr. Navneet Kumar Saraf, Director and CEO; Mr. Ashish Kumar Saraf, Director and CFO; and Mr. Anil Gadodia, Group CFO. I'll now hand over the call to the management for their opening remarks, followed by the Q&A session. Over to you, sir.

Yes. Thank you, and a very good morning to all the participants on this Q1 investor call of Technocraft Industries India Limited. We are looking forward to an engaging discussion. Overall, it's been, I would say, a fairly stable quarter given the very turbulent economic climate led by geopolitical disturbances worldwide. Obviously, one of the main factors contributing is this U.S. tariff on products on which Technocraft is also impacted given our strong exposure to the U.S. So we will -- I'm sure there will be a lot of questions pertaining to that. So we'll be happy to discuss. So welcome again, and we can now start the call. Thank you.

[Operator Instructions] First question is from the line of Chetan Vora from Abakkus Investment Managers.

Sir, I would like to understand your comment on the scaffolding demand environment.

So the scaffolding demand environment in -- particularly in the U.S. is currently challenging. This is also reflected in our first quarter results, where we have seen on the preceding quarter-on-quarter, a flat performance in sales as well as profitability. This is mainly on account of -- actually due to various changes in tariffs that have been going on since April, there has been some slowdown. Customers are on hold mode. What we are seeing is that there is a delay and pushback in procurement happening in the industry. Amongst all these things, one of the positives is that we are not seeing cancellations of capital projects. So we are seeing that there are projects awarded and that are going to go forward, but there is being a pushback and customers are only buying what they need immediately as compared to buying any time in advance. They are increasing utilization of their scaffolding, so they are buying later. So all those things are going on. Having said that, the impact on U.S. tariff is actually not so bad for our Scaffolding division because we are not subjected to this additional 25% Russian penalty that has been levied. We are subjected to the 50% steel tariff that has been going on since February, and that is applicable to all countries with the exception of the U.K., which is not even a competitor. And then we have the reciprocal tariff, which has increased from 10% to 25% on India. So, we are still lower as compared to China, which is our biggest competitor in the U.S. as far as tariff is concerned. So, we have we have no concerns about being able to pass on the tariffs to our customers and the customers are -- there's no competition as such from local production in the U.S. as well. The effective tariff for us on scaffolding at this point is about 35%, which is quite manageable. But the concern is that what -- this is definitely causing some disruption in the demand environment, which I think will be short term, but it's difficult to say for how long. We are -- coming quarter, July to September is traditionally the busy season in the U.S. in the industrial sector. So, on one hand, we are hoping for a pickup in demand, but it's -- there's also a little question mark on what the tariff does. So that's as far as U.S. is concerned. Outside the U.S., it's positive. We are seeing no change in the demand environment in India. In India, the demand is robust for our formwork products. And also, the demand is quite strong in the Middle East, which is our other important market, and that's growing substantially, the UAE, Saudi Arabia and that region. And the rest of the countries are steady. So, this is a snapshot of the demand environment.

But now the situation has only worsened, right, post the quarter 1. And the tariff what he has been talking about, has those tariff been implemented or it is just right now at the uncertainty level at what the effective rate would be?

Certainly, the situation is worse than what it was in quarter 1. It has deteriorated in July and August. As far as implemented, so the increase in reciprocal tariff from 10% to 25% has been implemented. with effect from August 10. So, shipments that have sailed after August 10, once they arrive in the U.S., they are going to be subject to 25% tariff. That additional 25% is expected to get implemented from 27th of August. That’s what 27th August for shipments filing after 27th August, not arriving.

And the shipment -- okay. And the busy period, what you talked about from July to October, November, and now we are in that busy period. So the demand will be certainly getting affected, right?

Yes, it will be getting affected.

Okay. And sir, as you were talking about in the last call that the newly plant has been commissioned. So this year, we are looking out for the revenue of INR 400 crores from those plants and plus 10% organic growth for the scaffolding and with a profitability of exit margin of 20%. Where do we stand in those guidance, sir?

So the new plant is actually fully commissioned. So that part is actually doing quite well. Our Aurangabad plant is now at about 75% capacity and should get to close to 90%, 95% in August and September. So that part is quite good. Unfortunately, I have a concern that the increase in our formwork business that we are expecting this year may be slightly negated by a decrease in our scaffolding business if the demand environment in the U.S. continues to be sluggish. So that is the only concern. But yes, the Aurangabad plant is not catered for the U.S. scaffolding business. That's entirely for domestic consumption. And there, we are on track.

So INR 400 crores of revenue will be getting approved. But the 10% revenue growth, when we are expecting?

Yes, we are on track. The Mach One sales, which was out of our total sale of INR 1,300 crores in the last fiscal year, Mach One was about INR 520 crores. So we are on track to see Mach One increase to about INR 900 crores this year. That part -- on the back of the increase in Aurangabad. That part, we are on track. Where there could be a change is the scaffolding sales, which was about INR 800 crores, a little less than INR 800 crores last year. There, we could actually see a degrowth this year.

And what are the degrowth we are working with as of now?

Very difficult to predict right now because we are in such a turbulent environment. First quarter was actually flat. First quarter, we did not see much of a degrowth. It was actually flat, maybe about INR 20 crores kind of a degrowth. But this quarter, actually, we are -- we were expecting a significant increase because of projects, capital projects that we know have been awarded, but those may not happen, those can get pushed in subsequent quarters. But it's a very dynamic environment. It's very difficult to, at this point in time, give a guidance on whether there will be a degrowth, there may not be -- if there is how much, very difficult to give that kind of a guidance right now, as you can appreciate.

Perfectly appreciate it, right, sir. Sir, lastly, in terms of -- if the revenues are affected, obviously, because of the negative operating rate, the margins also will be getting affected, right? That is a logical thing, right, sir? The margins we are expecting the improvement of the scaffolding on the lower base of last year.

There is a degrowth in sales, obviously, the margins will get affected because our overhead costs are high. So the overhead costs don't get absorbed fully.

Right. But that is the one despairing factor is that the formwork, which has been seeing a good response from the new plant. So the new plant incremental sales will be getting offset by the decline in the scaffolding sales, right? So broadly on a Y-o-Y basis, we should be seeing a nominal growth rate, right and not the growth what we were expecting earlier?

Yes. I mean the good news is that because we have a diversified product base and geography and because of our almost 50% sales in India, we are currently not seeing India business being affected. And in fact, we are seeing India business growing. So I think -- I hope that this turbulence in the U.S. is short term, doesn't last too long. And even if it gets serious, I don't think the degrowth will exceed the growth in India. So we should -- at a worst-case scenario, we should at least be flat. We should not see any decline. We should at least be flat or we should at least see some small growth over '25, '26.

Right, sir. And sir, lastly, what is this other income amount, which is like close to INR 40 crores, INR 39 crores which was like INR 30 crores plus.

Mr. Anil Gadodia will answer that, yes.

Yes. The other income of around INR 39 crores consists of mark-to-market of investment that we have around INR 22 crores and ForEx gain and loss of -- gain of INR 8.5 crores. So these are the 2 major costs.

And in the segmental thing, where it would be sitting this other income in the drum closure or where it would be sitting in the...

No, it will be unallocated.

Both these things, yes?

Yes, both the things. INR 19.6 crores, if you see unallocable net after expenses. That's the income, INR 19.60 crores.

The next question is from the line of Aejas Lakhani from Unifi AMC.

Am I audible?

Yes.

Yes, sir.

Okay. So I am fairly new to your company, but I've had the chance to look at your history and the growth outlook. I have 1 overarching structural question and 3 semantics on the business. So would you prefer I ask you everything in one shot or go one by one?

Either way is fine, whatever you prefer.

Okay. So sir, I'll start with my overarching question. So sir, see, as the -- my understanding is that the drum closure business, which is a fairly mature business and is growing at lower rates and generates a very high ROCE from that pool of cash flow that you had, you built out the scaffolding and formwork business, which is a relatively more higher growing business, but is weaker on the ROCE side with 15%, give or take, depending on the year, ROCE margin profile. And then also coupled with that, given that it's a much smaller size of the business, the engineering business again has a high ROCE and maybe the potential for incremental growth coming from that segment. So my query is that given that your ROCE profile of the drum closure is so attractive, you've chosen to build out the scaffolding and engineering and textile, I'll just come to in a bit. But what I'm trying to understand is that given the mix of your businesses, as the growth sort of kicks in, and it's coming more from scaffolding given just the size of that piece in the overall scheme of things. Is it a fair assessment that the ROCE profile, which is what it is today, will gradually start declining as the share of the scaffolding increases?

Sure. So I can answer that question first then before you go on to the other segmental question. So look, I think as far as the observation regarding how and why we built the scaffolding business, so the scaffolding business has not been built using cash flows generated by the drum closure business. Actually, if you go back and see the history, the scaffolding business is as a contract manufacturing business. And profit margins single digit for a long time until about 2014, 2015, when we...

Sorry to interrupt, but your audio is breaking.

Sorry, am I audible?

Yes, sir, much better.

Okay. So from 2015 onwards, when we started our own distribution model, the margins in scaffolding increased. Now -- yes, the scaffolding business ROCE will definitely be lower than drum closure business. It's -- as you rightly observed, it's actually in the 15% to 20%. Our target is 20%. We have been averaging 15% give or take, in certain years because of localized factors. The business is in also growth mode. So, what happens is as we are investing and building up assets and working capital, there is a lag between investing and seeing the returns of 1 or 2 years. So, because the business is in that growth mode, we have not been averaging consistently 20% ROCE. We've been averaging 15% ROCE. Plus, there have been in the last couple of years, local disruptions like this tariff now, freight and so on. Having said that, yes, the rationale is that as the scaffolding business grows, obviously, the average ROCE will come down. It will not be at the high -- at the late high 20s, 25%, 26% that we have for the group. It will be in the lower 20%. I mean, right now, that's where we see the average ROCE being. Our target internally is 20%. We would like to have an average ROCE of 20%. Now what will also happen is that the growth that in the scaffolding and formwork business is having is primarily driven by formwork. Scaffolding, we are almost close to peak levels. Now the scaffolding business is the one where we have our own distribution model, which requires us to have high inventories. Formwork business is primarily domestic and Middle East and it's made to order. So it doesn't require the kind of investment in working capital that the excess scaffolding business requires. So as the percentage of formwork business increases from current levels of 40% to about 65%, 70% in the next 3 years, the ROCE effectively of the scaffolding formwork business will also increase from 15% to 20%. Drum closure will continue to be at high ROCE. So therefore, as a group, we will be about 20% ROCE. The engineering design services is also a high ROCE business. That obviously doesn't need any working capital. In fact, that doesn't even need any investment. So it's not like we are requiring cash input for that business to grow. And in the short -- in the midterm, next 4, 5 years, yes, the scaffolding business will be driving the lion's share of the growth. But actually, beyond that, we see the engineering services business also becoming very sizable. And if I see the next 10 years, that is going to be a very sizable part of our portfolio given the overall marketplace. I mean, we -- the engineering business has seen substantial growth in the last 5 years. And we are still small compared to some of the large peers like LTTS and Quest and Cyient and so on. And we are exactly in that market space. So we see this business actually becoming a very dominant part over INR 1,000 crores over the next 5 to 6 years. And so yes, to answer your question, while the average ROCE will definitely come down, but not below 20% based on the kind of growth that we are expecting and the business mix of the scaffolding business, which is more formwork, less scaffolding.

Understood. And sir, just a quick follow-up on that response. So, formwork out of the INR 1,200 crores from this segment that we report, give or take, of scaffolding and formwork, today, the mix is 40% formwork, 60% scaffolding, and you're saying that formworks will start to incrementally drive growth, which will help the ROCE profile of this segment. Is that understanding, correct?

Yes, perfectly.

Perfect. Sir, next is, I'm just seeking more color regarding the engineering services business. So, is this, again, like the others pure FTE model? Do you have on-site engineers? How do we compete, especially given that there are large established players? So why will customers really choose us over those cohort of large, well-established customers? And also, that we have 84% ownership of the sub, right? So, what is the -- how does that come into existence? Do we intend to take it to 100%? Could you give more color on this entire segment? And also, do we intend to get somebody from the industry to run this piece, who runs this piece? What's -- how do you expect it to deliver the growth that you just spoke about?

So this is an ER&D business, and it's a focused ER&D business, which provides engineering and product development services in various verticals like industrial, transportation, machinery, et cetera. We do not do commercial software development like many of the other IT companies do. We are focused on ER&D. Now yes, there are some large established players in the ER&D segment like L&T Technology Services and Cyient and so on. But their share even with those players, I think this is a segment that is very much in its infancy. It is far from maturity level. And the overall share of Indian companies is miniscule compared to the global spend in this segment. Countries like U.S., U.K., Western Europe, Japan, are having huge shortages of engineering talent. And they -- so therefore, India has a very sweet spot in this segment. We also compete with a lot of domestic companies in these countries where we operate in. And so that's a large segment of business that is there. how we have been able to get established and get our foot in is when we started this company, we focused on sectors outside the traditional sectors like automotive, with some of these large companies focus on. We stayed away from the passenger car segment, which was very crowded, and we, as a group, did not have domain expertise in the passenger car segment. So a company like Mahindra or Tata, for example, can make large inroads in that segment, but we didn't go. We went after segments like machinery and industrial products, where the competition was more local players. And as a result, our growth was slower because the size of customers was smaller, but we built our profile. We built our team, we built our references. In the last 4 years, after the company reached just about INR 100 crores in revenue, which was 4 years ago, we expanded our sales team. We recruited senior professionals from L&T and other companies in the U.S. We created verticals. We recruited vertical heads with domain expertise. And they are the ones who are running the company now. So we are -- we have a very seasoned experienced leadership in sales delivery in this company now as the company is growing. And now we are also targeting the large accounts. Now we are competing with the big players, and we have been able to successfully make inroads, which is what gives us the confidence that the growth will be faster and higher in this business because it's always more tedious to get from 0 to a base of INR 100 crores. But then once you get that base, then the momentum becomes stronger. So we are in that phase right now.

Understood. And sir, so basically, our focus continues to be machinery and industrial applications and products. Is that correct?

Yes, 7 verticals, industrial products, transportation, machinery, plant engineering, medical devices.

Okay. And you have experienced sort of people who have joined you are now building the business and you've invested in this segment for the last 2 years from a sales and marketing perspective.

Absolutely. And delivery.

And delivery. Okay. Understood. And sir, just on that query of why do customers really choose us? And what is the reason behind the 84% ownership?

Yes. So, 84% is owned by Technocraft. 7% -- 8% is owned by promoters of Technocraft. And then there is a 7% that is held by an individual who used to be in a senior managerial position in the company. He used to be the CEO of this company till 2020. He's based in the U.S. and then he had to leave due to certain health and personal reasons. So -- but he continues to have that 7% stake. But he's not involved in the operations or management of the company anymore. But other than that 7%, we are controlling 93%.

Understood. And sir, just -- so this -- the individual that held the 7% as CEO...

Sorry to interrupt but I request you to rejoin the queue for the follow-up question.

Sure. I'll just complete this follow-up question and rejoin if that's okay.

The next question is from the line of Jay Jain from Astute.

I wanted to know what is the effect of the tariffs on different segments individually, like scaffolding. And also you mentioned that scaffolding is already covered under the general tariff of steel and aluminum. So what will be the precise number, which we should work with?

So on the scaffolding, currently, the tariff without considering the Russian oil tariff is 23%. That is the tariff that is applicable on the finished product value reaching the U.S. That is based on a combination of the 50% tariff on the steel content and 25% reciprocal tariff on the residual content of the product. If the Russian oil tariff gets into effect on 27th August, then the effective tariff on scaffolding will increase to 34%. On drum closures, currently, we are at 27.6%, which will increase to 52.6% if the Russian tariff gets into effect. Same situation in textiles. It's currently at 25%, which will increase to 50% if the Russian tariff gets into effect.

So, with the new tariff, if they come into effect, it would be almost impossible to do drum closures and textile. Am I right in assuming that?

Yes. So, I'll answer it segment by segment. So, drum closure, no. Drum closure, our sales realizations are actually quite high in the U.S. We have currently taken a -- we are not going to compromise on our market share in the U.S. So in the short term, we have taken a decision that should the 25% Russian tariff come in, we will not pass that on. We will take that -- we are comfortably able to pass on 27.6% in the drum closure segment to the customers, but we will not pass on the additional 25%, primarily because our main competition is from the EU and the tariff on the EU is 15% for drum closures. Our competitors are -- so at 52.6%, we feel we'll be at a disadvantage. So therefore, if that 25% comes in, we'll absorb it. So there will be an impact to that extent on the profitability of the drum closure sales in the short term. We expect that, that 25% Russian tariff is going to be short-lived. We don't expect that to be there for a long term. Should that be there for a long term, we are in wait-and-watch mode, then obviously, we will look to move to alternate manufacturing locations as a possibility to save ourselves from that incremental 25%. That's as far as the Drum Closure division is concerned. That's our strategy. Scaffolding, we are able to pass on. So no concerns on that. Textiles is a problem. Textiles, certainly 50% is not something we'll be able to pass on. So we will see our sales to the U.S. stopping. And we are watching the situation closely. Again, if that 25% goes away, then the situation will be better. If not, we will look at diversifying the manufacturing.

Just to understand, what will happen to most of these businesses? Are you planning -- as you mentioned, you will probably take a call about manufacturing other locations. But competitively, what would be your position? And what is the percentage of your total revenue in each segment to the U.S.?

Yes. So drum closure, about 30% of our total sales is in the U.S. And scaffolding, about 40% of total sales is in the U.S. and textile about 25%, 30% is also in the U.S.

The next question is from the line of Avnish Tiwari from Vaikarya.

On this scaffolding, you just explained the tariffs. So even with the Russian linked tariff, you are leading to 34%. We will still be much lower than what China is getting today. So you should not have a problem there in terms of passing it on, right? Is that understanding correct?

Yes. That's correct.

And when you're exporting the scaffolding to U.S., the steel you are buying, are you buying -- when you buy it imported versus free of duty or you have to buy it domestically, hence, you disadvantage on the price of the steel?

We are buying domestically, and there is no disadvantage. Actually, imported steel is a lot more expensive. Currently, if you are manufacturing in India, it's cheapest to buy Indian steel. There is now a safeguard duty in India on imported steel.

But you're buying for export purpose or I think these duties are exempted or nut paid.

No, no. We are not only buying for export purposes. We are also selling a lot in the U.S. -- in India, sorry. Plus, we have special grades. So, we can't just buy commercial-grade steel. We have worked with JSW and developed special grades that can be used for our scaffolding products because of certain technical requirements. And the relationship with JSW is more than 20 years old. So, it's very difficult for us to change that. So no, we are not looking -- we don't buy imported steel.

In the Engineering division, which segment are you experiencing very good order flows and type of work you are doing? Can you just give us a segment where you're seeing a strong demand pull over last quarter and as you go forward?

Industrial products and machinery and transportation, these 3 have been our dominant segments in the last 4 years. So more than 75% to 80% of the engineering service revenues comes from these 3 verticals. We added plant engineering only last year. And so that is now seeing substantial growth over 100% because that's a new vertical. And there, we have very large multibillion-dollar type of customers. So that's something where I think that will drive future growth in that. So that's how it is.

The next question is from the line of Chintan Modi from Haitong Securities.

Sir, I wanted to understand your formwork business, the Mach One. If you could help us understand that -- I understand that it's a high-growth business, and this is where the customer adopts to this technology. So what are the key drivers for the customer to move to this technology? What are his constraints? And how fast you see this changing across India? How this business is more from, let's say, an opportunity-wise that you look at and whether this is a geographically constrained business? This would be very helpful if you could explain it.

Sure. So Mach One is our aluminum formwork system, and it's based on monolithic casting. It is being widely adopted in India and other developing countries, mainly because one, is it saves labor. Construction is in India has historically been done in a very laborious way and availability of labor is more and more becoming a constraint. Second is it reduces the construction time by increasing the speed of construction because you are pouring the concrete and the panels are basically making you being able to pour an entire floor at one time called monolithic casting. So that speeds up the construction process. And the third thing is the finish. The quality that you get is much better, doesn't require plastering, so it saves an additional operation. So these 3 are the main driving forces that is increasing the adoption of this technology. This technology was introduced in India almost 20 years back. It was earlier 100% imported from company based in Malaysia. And then in the last 10 years, we have seen domestic players come in and start introducing systems based on this technology like Mach One. Now we are seeing this becoming almost like a de facto standard in -- amongst developers in India. Architects are subscribing this technology in their specification. So in at least the metros and the Tier 1 cities, so it's become a de facto standard. And Tier 2, Tier 3 cities are now also waking up to it. So I think there is still a lot of market left in India to adopt this. And these are the 3 main driving factors.

Understood. So when you see that... So is going to be higher than the scaffolding business, which is probably about 20% today. So I assume the ROCE in this business will be higher than 20%. So you would be confident to reinvest that back into the business and keep growing at a much higher pace over, say, next 5 to 10 years?

Yes, absolutely. I mean that's really what we have done, and that's our strategy because currently, we are not able to export this. We don't have enough capacity. Even with the increased capacity that we have done in Aurangabad, the lion's share of that is still being absorbed domestically. So, there is a big market here. There's also a large market in Saudi Arabia, South America, Africa. So yes, absolutely, we see a good possibility here of doing 4x growth.

Understood. And what is the market structure today in India in terms of competition?

So, there are several companies. I mean, there are obviously some international companies from Malaysia, South Korea, Europe that import the product in. Then now there are Indian companies. So other than Technocraft, there are a couple of companies at the same scale as Technocraft for aluminum formwork. There's a company called KNS based out of Pune, which is quite a prominent player. And then there are probably 20-plus small-sized companies that are catering to this segment as well, companies doing under INR 100 crores of turnover. And there's demand for all of them. Each of them operates at different price levels and based on their brand recognition, but the market is able to absorb all of them and growing.

Understood. And one last question on the same thing.

Sir, sorry to interrupt, but I request you to come back for the follow-up question. [Operator Instructions] The next question is from the line of Purva Zanwar from Batlivala & Karani Securities India Private Limited.

I had a question on Scaffolding and Formwork division. So you mentioned that scaffolding revenue were somewhat constant Y-on-Y in the quarter and formwork saw very good growth. So what led to this 8% decline? And also, when I look at your volumes for June '24 and June '25, they have grown in each of the segments. So what has led to realization drop for the same? That’s it.

Firstly, the decline of 8% in revenue overall was mainly because the decline in scaffolding revenue was more than the increase in formwork revenue. I mean our -- overall in this quarter compared to the same quarter period last year, our revenue in scaffolding mainly on account of sales in the U.S. through our U.S. subsidiary was lower. I don't have the exact percentage of how much the U.S. subsidiary sales was lower, but it was more than 10% for sure. And formwork, the sales was higher definitely compared to the last quarter. So that was the reason for net Y-on-Y at a net level, the realization. This is based on the quantity. And based on realization, I don't think there has been a substantial effect in the price realization. I don't have actual realization numbers on quarter-on-quarter basis. But I don't see there is a significant difference in realization, but we can give those to you separately.

The next question is from the line of Rahul Kumar from Vaikarya.

Sir, on the U.S. Scaffolding business, you mentioned that you're seeing some challenges in terms of demand. So can you elaborate which industry or subindustry are showing the highest delay in the purchase of this scaffolding?

But our largest share is in the industrial services sector. So the industrial services driven by industries like LNG, power, petrochemicals, refineries and also some of the high-tech industries where the demand is very strong actually, like semiconductor plants, et cetera, they are all actually deferring or delaying purchases. And like I said, we have not yet encountered any cancellation of projects, but we are seeing delays. So these are the industries.

Okay. And again, on the U.S. scaffolding business only, what is the profitability? How has it moved, let's say, versus last quarter and this quarter?